Exercise 7-13A: Effect of credit card sales on financial statements

Ultra Day Spa provided $120,000 of services during Year 1. All customers paid for the services with credit cards. Ultra submitted the credit card receipts to the credit card company immediately. The credit card company paid Ultra cash in the amount of face value less a 5 percent service charge.

Required

a. Show the credit card sales and the subsequent collection of accounts receivable in a horizontal statements model like the one shown next. In the Cash Flow column, indicate whether the item is an operating activity (OA), investing activity (IA), or financing activity (FA). Use NA to indicate that an element is not affected by the event.

b. Based on this information alone, answer the following questions:

1. What is the amount of total assets at the end of the accounting period?
2. What is the amount of revenue reported on the income statement?
3. What is the amount of cash flow from operating activities reported on the statement of cash flows?
4. What costs would a business incur if it maintained its own accounts receivable? What cost does a business incur by accepting credit cards?

Exercise 7-14A: Recording credit card sales

Luna Company accepted credit cards in payment for $6,000 of services performed during July Year 1. The credit card company charged Luna a 4 percent service fee; it paid Luna as soon as it received the invoices.

Required

a. Prepare the general journal entry to record the service revenue.

b. Prepare the general journal entry for the collection of the receivable from the credit card company.

c. Based on this information alone, what is the amount of net income earned during the month of July?